Cost efficient culture reaps market rewards by investors, Deloitte Research study indicates

Strategic Cost Reduction study about how the banks with the most improved cost efficiency ratio saw their share prices increase by 19.2%. Also lists a portfolio of initiatives that firms can use to help achieve savings of up 10-20%.

Contact: Brandi Schiff                  
Citigate for Deloitte         
312-895-4734   
brandi.schiff@citigate-chi.com

Cost efficient culture reaps market rewards by investors, Deloitte Research study indicates

10 banks with greatest improvement in cost efficiency see 19.2% boost in stock price

NEW YORK, April 25, 2002 - Investors reward firms that successfully increase their operating efficiency, indicates a recent study by Deloitte Research. During the strong economy of 1997-2000, the large banks that had the most improved cost efficiency ratio saw their share prices increase by an average annual rate of 19.2%, compared to the 9.6 % gain for the 100 largest banks overall. Insurance, securities and investment management firms that aggressively manage their costs also outpace the competition, according to the new Deloitte Research study, "Fit for the Future: Building competitive advantage through strategic cost reduction."

According to the study, by adopting a strategic approach to cost reduction throughout the enterprise, financial institutions can begin to build competitive advantage and create shareholder value. "Cost optimization and business strategy are joined at the hip. A cost reduction program that doesnt consider a companys overall strategy risks the attainment of long-term strategic goals," said Dennis Yeskey, principal, Deloitte and Touche.

In setting goals for a cost reduction program, firms can analyze their competitive position, evaluate potential savings across each line of business and determine the level of cost reduction required to support the firm's current share price. Pierre Buhler, principal, Deloitte Consulting Financial Services Industry practice said, "There are both short-term and long-term initiatives to become more cost efficient. Long-term cost efficiency is about changing the culture, not knee-jerk reactions. A key issue is how to manage incremental growth and understand the true cost of each additional dollar of new business."

The report estimates that firms may achieve savings of 10-20% when utilizing a portfolio of the following initiatives:

1.   Severance Payments: Firms may reduce the traditionally high expense of layoffs by paying severance benefits from the firms qualified pension plan, thus lowering the total cost of severance benefits.
2.   Employee Benefits: By consolidating pension and benefit plans, firms may reduce both their vendor and internal administrator fees while at the same time lowering total costs.
3.   Compensation Structure: Performance driven equity plans and strategic performance management systems have the potential to reduce a firms cost of sales by three to six percent, as well as retain the strongest performers.
4.   Reengineering: Well planned and managed reengineering programs frequently yield cost savings of 25-30%, while at the same time improving service levels and time to market. Reengineering business processes to fundamentally change how work is done may achieve long-term gains in increased operational efficiency and reduced errors.
5.   Outsourcing: Firms should consider not only outsourcing new functions, but also employing new business models. Entering into relationships with vendors that are more like strategic alliances, rather than the traditional vendor relationship, can achieve potential savings of more than a third of business as usual operating costs from outsourcing.
6.   Strategic Sourcing: A strategic sourcing program of renegotiating contract rates, competitive bidding, a central contract database, and enterprise-wide sourcing, may reduce a firms annual telecommunication expense up to 15% over a period of 24 months.
7.   E-Procurement: Companies that go beyond simply purchasing online to automating their entire purchasing process can eliminate the invoice altogether, while at the same time simplifying the reconciliation process, thereby updating the financial data in real time throughout the entire practice.
8.   Renegotiating Leases and Contesting Real Estate Assessments: Depending on their negotiating power and dynamics of the individual market, companies may achieve reductions of up to ten percent on their leases. Firms that own property can potentially reduce their property tax liability by contesting their assessments, which were often established when property values were higher.
9.   Tax-Efficient Structuring: Firms should review financing, leasing, research and development, and corporate restructuring in the area of tax. These cost reductions may be substantial but will vary widely depending on a companys characteristics and country tax regimes.
10.   Seeking Business Incentives: Companies can apply for business incentives from state and local governments such as reductions or deferrals of property and sales taxes.

To obtain a copy of Fit for the Future: Building competitive advantage through strategic cost reduction," or to talk to Mr. Yeskey or Mr. Buhler, please contact Brandi Schiff -- (312) 895-4734 or email to: brandi.schiff@citigate-chi.com.

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About Deloitte Research
Deloitte Research, a permanent thought leadership organization established by Deloitte & Touche and Deloitte Consulting, is dedicated to providing ongoing research and insight into the critical global and industry-specific issues facing business today. Comprised of both practitioners and dedicated research professionals from around the world, Deloitte Research combines industry experience with academic rigor. Our research identifies and analyzes market forces and major strategic, organizational, and technical issues that are changing the dynamics of business. It focuses on leading-edge industry-specific issues and global trends, providing insight into new evolving challenges.

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